SEC Refuses to Allow Financial Sector Firm to Omit Shareholder Proposal Concerning Disclosure of Climate Change Risk
As a member of an international consortium working to find ways to encourage companies to pay attention to climate change and other environmental matters, (more information on the project here), I was interested to see that the SEC recently refuse to allow PNC Financial Services Group, Inc. to omit from its proxy materials a shareholder proposal seeking disclosures concerning the impact of the company’s activities on climate change. (SEC NO-Action letter, not yet available.)
Specifically, the proposal asked the PNC board of directors to disclose its “assessment of the greenhouse gas emissions resulting from its lending portfolio and its exposure to climate change risk in its lending, investing, and financing activities.” Shareholder proposals relating to environmental issues generally and climate change specifically are being filed with some regularity, due in some part perhaps to the SEC issuing guidance on climate change disclosure in 2010. (available here). In that guidance the staff made clear that the standard for disclosing climate change risks is the same as for any other risk: if the risk is material is should be disclosed. Additionally, the same grounds for exclusion that apply to other shareholder proposals are also available to companies seeking to exclude proposals touching on environmental concerns.
PNC, like many other companies, tried to block inclusion of the shareholder proposal on the ground that it dealt with ordinary business operations and therefore was properly excludable under Exchange Act 14a-8(i)(7). Because PNC is afinancial services company it is expected to make risk assessments as part of its business and thus the SEC could easily have concurred with the company’s argument that the shareholder proposal raised “day-to-day choices [made by the company] in extending credit, managing assets, and investing capital, and how PNC measures the totality of the risk associated with doing business with particular companies or making certain investments.”
The SEC did not accept PNC’s argument however, and instead noted that “the proposal focuses on the significant policy issues of climate change” thereby making the proposal properly excludable. The issue presented turned on whether there was a sufficient connection between PNC’s activities and climate change. The SEC was careful to note that the decision “does not represent a view on the need for the financial sector to consider the issue of climate change.” Instead, its decision was based on the particular facts presented, including the fact that PNC itself represented that there was a strong relationship between its activities and climate change. The bank had stressed the importance of regulating climate change impact as part of its reputation and stated that it performs a “supplemental evaluation for companies in the extractive industries, including an understanding of any significant environmental impacts.” By so linking its business operations with the significant social issue of climate change, PNC took the issue out of being one of ordinary financial institution risk assessment and therefore lost the right to exclude it on those grounds.
The long-range implications of this letter remain to be seen. Of course, a no-action letter has no legal import beyond the precise issue addressed in the particular letter and as to the precise company identified in the letter. On an informal basis, however, such letters carry great weight. Companies may respond in a number of ways to the PNC no-action letter decision. Among other steps, they might increase their environmental reporting of their own volition so as to stave off shareholder proposals on the matter, or they might tone down the level of rhetoric they engage in touting their environmental “propriety” (“greenwashing”?).
Regardless of the precise steps taken, the PNC no-action letter suggests that it may be more difficult for companies to dodge disclosure of the impact of their activities on climate change and other environmental issues in the future.